FHA hits brakes on housing recovery with budget cuts

U.S. spending cuts scheduled to kick in tomorrow will constrain the availability of Federal Housing Administration mortgages that account for about a quarter of originations, threatening its role in the year-long housing recovery.

Department of Housing and Urban Development cuts will force staff reductions that could slow FHA loan approvals and curtail programs such as foreclosure counseling, according to HUD Secretary Shaun Donovan. If FHA lending drops by the same rate as HUD’s budget, it could shave about 2% off U.S. home sales this year.

The so-called sequestration, $1.2 trillion in automatic reductions in federal spending, would pare $42.7 billion from non-defense federal agency budgets this year, according to government estimates. For real-estate, the impact would be magnified because FHA’s market share has grown to five times its 2006 level as it expanded its role during the property bust. Since 2008, the FHA has backed more than a quarter of U.S. mortgages, according to HUD data.

“The FHA has been a critical support to the housing market, for first-time buyers and purchases of homes in general,” said Mark Willis, a professor at New York University’s Furman Center for Real Estate and Urban Policy and a former economist at the Federal Reserve Bank of New York. “Any decrease in the rate the FHA is able to ensure mortgages will clearly hurt housing.”

Hearing Today

The HUD budget cuts would have the biggest effect on lenders that don’t have so-called direct endorsement authority, Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC, wrote in a note today. At a Senate hearing today, Phillip Swagel of the University of Maryland School of Public Policy urged Congress to tighten FHA qualification standards, further constricting the availability of loans.

Staff cuts “could impact the willingness of some lenders to originate FHA loans that require FHA to approve the insurance as it could take longer for FHA to act,” Seiberg wrote.

Investors in companies from builders to home-improvement retailers are dismissing the likelihood of a weakening in housing. An index of homebuilders fell 0.1% today at 10:45 a.m. in New York after rising 7.4% this year and 73% over the past 12 months. The median home price last month rose 12% from a year earlier, the biggest gain since 2005, according to the National Association of Realtors. Home sales in January increased to a 4.92 million annual rate, 43% above a record low two years ago.